My Hedge Fund - The First Investments

August 7th, 2007

I’ve been making some investments for My Hedge Fund over at Investopedia. I’ve decided to go quite an aggressive route with the portfolio. Instead of ‘playing it safe’ like most investors tend to do, I will leverage myself using options.

The basic philosophy behind my portfolio design is this:

• It is relatively easy to pick 4 or 5 winning stocks that should do extremely well over the next 2 to 5 years. These stocks are easily picked by noticing GREAT companies that are still growing fast and have lots of upside potential.
• Through the use of options (and warrants if Investopedia would allow, which it doesn’t) I will leverage my portfolio to act much bigger than it really is. Any losses will be magnified but any gains will also be magnified. The simple truth is that losses are limited but gains are potentially unlimited, and so I will leverage myself to take advantage of this simple truth.
• Instead of investing 80%+ of the portfolio in stocks, I can invest 40% to 50% in options. This will allow me to control much more stock than my portfolio would allow if I only invested in stock.
• With the remaining 50% to 60% cash position I will begin to buy high yielding stocks that have a tendency to grow their revenue, earnings, cash flow and of course, dividends.

I will use options to control more shares of stock (of great companies only) than if I invested every penny of my portfolio into buying only their shares. I will then use the remaining half of my cash to invest in dividend yielding companies to help give the portfolio some stability and cash flow.

As I buy stocks and options for My Hedge Fund I’ve realized that Investopedia is sometimes a pain. It has these trading rules which limit how much stock and options I can buy at once, so I have to do a lot of trades to acquire the desired stock/options. Also, because the money is divided evenly between US funds and Canadian funds, I must choose a few more companies that I would like to. My US portfolio will have the bulk of my options while the Canadian portfolio will have the bulk of my dividend stocks.

My first Options are:

• Yahoo (YHOO) Jan 2010 $20 Call Options
• Northern Dynasty Minerals (NDM or NAK) Feb 2008 $7.50 Call Options
• Garmin (GRMN) Jan 2010 $40 Call Options
• Whole Food Markets (WFMI) Jan 2010 $20 Call Option

And I’ve only invested in 1 stock so far. It is Silver Wheaton (SLW) for my Canadian portfolio.

Here is my reasoning behind each.

Yahoo

Over the next three years I believe Yahoo will release their international publisher program for webmasters to put Yahoo Ads on their site. This will bring a large number of new sites on board for which Yahoo will take its cut of the advertising dollars. This is also when Yahoo will REALLY start to compete with Google. Right now Yahoo’s publisher program is open to US webmasters only and on an invitation only basis. From hearing what those webmasters have said, Yahoo pays out a lot more money per click. As a result, many webmasters want to switch to Yahoo, but without the invite and without being a US citizen, can’t use Yahoo while this publisher program is in beta. So many webmasters are stuck with Google by default.

Google has done well, but some webmasters report after switching from Google to Yahoo having their earnings increase by multiples! Now, this might not be as good once Yahoo has a ton of new publishers adding advertising inventory to drive down the supply side. By simply having their system come out of beta and be available to webmasters world wide, Yahoo will instantly increase its potential earnings. I know a lot of webmasters want to switch, if not indefinitely, to at least try it out. Loyalty to Google isn’t as strong as many people believe. The entire webmasters community will have loyalty to only one thing, their earning power.

Even if Yahoo DIDN’T have their publisher program come out of beta within the next three years (which I doubt), Yahoo will still grow revenues and earnings simply because they operate the largest website on the internet and are always adding features and new portals. As a result, advertising revenue should continue to grow. Combine all of these upside potentials with the recent negatives and drop in share price, and I think Yahoo is a buy. I think Yahoo’s long term options are even better!

Northern Dynasty Minerals

It’s a world class mining company that is, in the words of Peter Grandich, one of the most undervalued mining companies in the world, perhaps by over 50%. It’s a relatively new find and a very large one. Seeing as its so undervalued, I decided to add some options (to further increase the leverage) to capitalize on that upside potential.

Garmin

This GPS maker is simply the leader. No other GPS system is as user friendly and jam packed with useful features as a Garmin! I’ve used some of the competitors systems and was really disappointed. I then switched to a Garmin and I would NEVER look back. It’s easier to use, gives less ‘wrong’ or ‘bad’ directions and… well it just works. Now as the price comes down more and more automobiles will come with GPS systems and eventually I wouldn’t be surprised to see it as a standard feature (like power windows) built into the dashboard on many vehicles.

One only has to look at past growth to see this is a phenomenal company with a lot of growth left. I’ve made one mistake about this company in the past (not buying it when I was going to!) and I don’t intend to make that mistake now. I think it may be a little overvalued at its current price but based on future growth I still like it.

Whole Foods Markets

The leader in the organic health food sector of grocery chains. It is the worlds leader of natural and organic foods. This is a very fast growing market segment (of which I am a supporter). I can only see this segment getting bigger as more and more genetic alterations are made to our food chain. Also, with all the chemicals floating around, getting some natural wholesome food is a must for health. It is the worlds largest grocery chain of its kind and yet it only has 155 stores! A quick growing, well marketed chain in an industry poised to continue growing… It doesn’t take a rocket scientist to see it will do well. Whether it be through acquisitions (like Wild Oats) or through its own growth strategy, this company will grow. I still don’t see a Whole Foods Market in my area… all I see is a few smaller stores that wouldn’t compete too well, and even those are a long drive away. When I see a Whole Foods Market in every area of my city, then I’ll know its starting to mature. It just has so much growth left and its a proven company.

Silver Wheaton

Well, I’ve wrote about this one before. It’s my favorite way to invest in silver. Read my last entry on Silver Wheaton for more info.

Entry Filed under: Articles